Israel: Public Company Shareholder Disclosure Obligations

Last Updated: 13 April 2017
Article by Yoram Shiv and Alex Berman

During a hearing in which the applicants requested permission to file a class action suit against the directors and officers of a public company ("Company"), the District Court of Tel Aviv (Economic Division) ("Court") discussed public company reporting obligations in the context of a proposed sale of the company.

In the present case, the Company had been negotiating with a potential buyer ("Potential Buyer") of 75% of the Company's shares from an existing controlling shareholder for a transaction price of approximately $125 million. During the negotiations, which ultimately failed, the Company disclosed certain information to the potential buyer that was not disclosed to the general public in the Company's obligatory public reporting, including information concerning possible tax exposure. The applicants maintained that this information should also have been disclosed to shareholders.

The Court held that information required to be released to shareholders in the framework of a public company's reporting obligations is not necessarily identical to the information disclosed during negotiations in connection with a specific transaction involving the company. Reporting requirements are set forth in the Israeli Securities Law, in the Reporting Regulations, and in the rules and case law of the Securities Authority. Disclosure rules for negotiations arise from agreements between the parties as well as general rules regarding the management of negotiations, such as the obligation to negotiate in good faith.

The Court explained that differences between public disclosure and transactional disclosure arise from the relevant parties' ability to digest, process and understand information, as well as from the monetary interest at stake.

For instance, a potential buyer of a controlling interest in a public company would presumably investigate all corporate data available. Due diligence on this scale is costly but reasonable, considering the nature of the intended transaction. Specifically, in the case at hand, the potential buyer was sophisticated and capable of not only analyzing all of the information provided to it by the Company, but also of understanding the relative quality and significance of each piece of data.

In contrast, the reference point with respect to the typical public shareholder is that of the "reasonable" investor, rather than a "sophisticated" investor. The Court indicated that as typically a reasonable investor does not have the ability or resources to analyze large quantities of data, flooding such a shareholder with enormous amounts of information might reasonably lead to confusion and run counter to the purpose of public company disclosure obligations. Therefore, public companies have an obligation to filter information provided to public investors so that material information, rather than all information, is provided to them.

In light of the above, the Court held that the mere fact that the Company provided certain information during negotiations to the Potential Buyer was insufficient to establish that such same information should also have been generally provided to all shareholders.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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